A Lesson in Annuity: Five Important things to Know about Annuity Buyers
Annuities are popular retirement products that promise to offer a steady payment during retirement and lower risks of investment. Many borrowers consider this do-it-yourself pension fund a quick way to generate a steady stream of income after 65. However, there are a few important factors to consider when purchasing these products, especially if you are unfamiliar with how they work. Read on to get a quick lesson in annuity, and gain a few tips that could help you in the future.
Consider the Payout
One of the most complicated aspects of an annuity is determining payout at retirement. These products can be a type of prepaid pension plan. Age is a large consideration to consider for payout. Returns may need to be verified with the insurance company based on performance. If a death benefit is factored into payout, consider sizing up any extra fees associated with this payout. You should ask the following three questions to determine if a payout from an annuity is needed:
- Do you expect to need a lifetime income after retirement to supplement existing retirement benefits?
- Have you explored other options and alternatives as part of an investment plan?
- Have you researched the performance of insurance companies and brokers?
Insurance vs. Investment
An annuity should be considered similar to a form of insurance in retirement years. Deferred annuities are usually traded with an insurance company in exchange for a fixed or variable rate of return on the product. An immediate annuity promises to deliver income in the retirement years by the form of a lump sum of money. Annuity borrowers should be aware of these methods and realize that both represent a form of both insurance and investment.
Individuals under 40 should consider a deferred annuity to protect assets and exchange older life insurance policies. Immediate annuities work better for those closer to retirement and the need for supplementing late retirement and social security benefits.
Check Portfolio Limits
Most annuity investments can be placed in a private portfolio up to a certain percentage. There are many statewide regulations on the specific percentage that a mix of portfolio investments can have for retirement purposes. Variable annuities can be invested in your private investment portfolio with less strict requirements.
Fee Structures
The fee structure associated with every annuity plan varies depending on whether it’s immediate or deferred. Early withdrawals can have hefty penalties that add up quickly. These fees are called surrender fees and for good reason. Cancelling a plan or withdrawing funds can charge a penalty of over 5% in the first few years. Major brokers and mutual fund companies usually offer lower fees.
Investment Diversity
Owning more than one annuity plan is an option that some annuity buyers have considered. Diversity in fee structure and planning for retirement changes is an option to consider for non-traditional retirement plans. Self-employed individuals may look into developing an assortment of products that have low fees. Many of these low fee products offered through investment companies can supplement SEP IRA plans.
There are many benefits and drawbacks to an annuity plan. Following these key points can help protect your investment against failure and insure that the lifelong pension you plan for is a good decision. Make sure you meet with a financial professional in order to avoid any issues and get all your questions answered. By making an informed choice, you can ensure your financial security for the future and avoid running into problems down the road. The information for this article was provided by the annuity buyers at myLumpsum.com.
Category: Annuity
